UK’s Annual Credit Report Underpinned by Structural Strengths

In its annual credit report on the UK, Moody’s Investors Service says that the UK’s Aaa government debt rating, and current negative outlook, continue to be underpinned by significant structural strengths. However the credit ratings agency (CRA) cautions that the government’s efforts to achieve fiscal consolidation and reduce debt over the next few years are being hampered by weaker economic prospects as well as by the risks posed by the ongoing euro area sovereign debt crisis.

Although these challenges are currently reflected in the negative outlook on the UK’s sovereign rating, Moody’s will revisit the Aaa rating and outlook in the first few months of 2013 to assess the impact of these challenges and of the government’s upcoming autumn statement.

The rating agency’s report is an annual update to the markets and does not constitute a rating action. The report can be accessed via the link provided at the end of this press release.

Moody’s new report highlights important strengths that underpin the UK’s Aaa rating, including:

  • A large, diversified and highly competitive economy, flexible labour force and structural reforms that position it well to return to its long-term trend growth rate of 2-2.5% over the medium term.
  • A favourable debt structure, including low refinancing risk and a strong domestic investor base.
  • The commitment to fiscal consolidation, which is heavily weighted toward expenditure cuts.
  • Very high institutional strength, including a wide range of monetary and fiscal policy tools. Moody’s expects these strengths to persist over the medium to long term.

The UK’s growth shortfalls have clearly been credit-negative and have reduced the sovereign’s ability to absorb further fiscal or economic shocks, but without leading to rating implications. Despite the UK’s clear political commitment to fiscal consolidation, the weaker macroeconomic environment will create headwinds for revenue growth and increase the risk that the country’s debt metrics will not stabilise within the next three to four years. This issue was the main driver of Moody’s decision to change the rating outlook on the UK’s Aaa rating to negative in February 2012 and remains a critical rating driver for the sovereign rating going forward.

In Moody’s opinion, the UK government’s most significant policy challenge is balancing the need for fiscal consolidation against the need for economic stimulus. The rating agency expects that the upcoming autumn statement, which will be released in December 2012, will provide greater clarity on how the government plans to manage this balancing act.

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